Democratic and Republican lawmakers mulled their next move yesterday as they left Washington for the Christmas holidays after US President Barack Obama urged them to pass a scaled-down tax package to avoid the so-called fiscal cliff.

To prevent automatic and massive spending cuts and tax increases due to kick in for all Americans on January 1, Obama called for a stopgap bill to protect middle-class taxpayers.

"There is absolutely no reason, none, not to protect these Americans from a tax hike. At the very least, let's agree right now on what we already agree on."

Obama said he met Democratic Senate leader Harry Reid and spoke to Republican House Speaker John Boehner on the phone to discuss a fall-back plan, while stressing he still believed a big compromise was possible.

He asked Congress to produce this week a package that at a minimum prevents a tax increase on the middle class, would extend unemployment insurance and lays the groundwork for further deficit reduction next year. The move would still satisfy his demand to raise taxes on the richest Americans, as all taxes from the era of his predecessor George W. Bush will go up on January 1, and Obama only envisages extending the lower rates for middle-income earners.

"Call me a hopeless optimist, but I actually still think that we can get it done," said the president, who will spend Christmas in his native Hawaii but told reporters he would be back in Washington this week.

Obama's suggestion would extend tax breaks to 98 per cent of Americans - those earning below US$250,000 a year. In talks with Boehner on a larger compromise, the president had offered to raise that threshold to US$400,000.

Obama seemed frustrated that Republicans were not willing to offer him a compromise after, in his eyes, he made major concessions to his opponents.

"Nobody gets 100 per cent of what they want," he said.

On Thursday, Republicans rejected a bid by Boehner to pass a backup bill to solve the crisis, leaving Washington in turmoil, markets spooked and renewing fears that America's political gridlock could spark a recession.

Obama's aides privately say they doubt that conservative deficit hawks, who oppose raising taxes as a matter of principle, will ever back a deal agreed with the president.

In that case, Boehner could opt to pass a compromise in the House of Representatives with the help of votes from minority Democrats - but that could undermine his position as Speaker with his own party.

If there is no agreement, taxes would go up on all Americans and hundreds of billions of dollars in government spending cuts would kick in next month - actions that could plunge the US economy back into recession.